Which of the following would necessarily cause a decrease in the price of a product?
A An increase in the number of buyers and a decrease in the price of an input.
B An increase in the number of buyers and a decrease in the number of firms producing the product.
C A decrease in the price of a substitute product and an improvement in production technology.
D An increase in average income and an improvement in production technology.
The correct answer and explanation is:
The correct answer is C. A decrease in the price of a substitute product and an improvement in production technology.
Explanation:
The price of a product is influenced by several factors, including demand, supply, and the prices of related goods. Let’s break down option C and see why it would lead to a decrease in price:
- Decrease in the price of a substitute product: A substitute product is one that can replace the product in question. If the price of a substitute product decreases, consumers may switch to the cheaper option, reducing the demand for the original product. A drop in demand, assuming supply remains the same, leads to a decrease in price as sellers try to attract buyers with lower prices.
- Improvement in production technology: When production technology improves, it typically leads to lower production costs. This allows producers to supply more of the product at the same or even lower prices, increasing the supply of the product. An increase in supply, assuming demand remains constant, causes the price to fall as competition between suppliers grows.
Now, let’s briefly look at the other options:
- Option A: An increase in the number of buyers typically raises demand, which would push prices higher, not lower. A decrease in the price of an input might reduce production costs, but this effect would not necessarily overcome the demand increase.
- Option B: An increase in the number of buyers would increase demand, leading to higher prices, and a decrease in the number of firms would reduce competition, also pushing prices up.
- Option D: An increase in average income could raise demand for the product, leading to higher prices. While an improvement in production technology could lower costs, the income increase would likely lead to higher demand, making it less likely for the price to decrease.
Thus, the combination of a decrease in the price of a substitute and an improvement in production technology in option C is the most likely scenario to cause a decrease in the price of the product.